Yesterday afternoon and in the aftermath of Chancellor of the Exchequer Philip Hammond’s “budget bombshell” I received a question from a reader.
“Why should self-employed people pay less in NI when they expect to receive the same benefits as those who are not? What am I not understanding?” This was prompted by Hammond’s decision to rescind a long-held view that the self-employed, as risk takers, deserved to be taxed at a lower rate than those in employment.
“NI”, for non-UK residents, stands for National Insurance and is the contribution made by workers and employers towards future retirement pensions and other social services. Though not named as such, it’s really nothing other than an extension of income tax and is just as much a firm fixture of overall payroll taxation. Both sides of the argument make sense although it is understandable that in a changing world the tenets of taxation have to change too. The idea of what constitutes the army of self-employed has changed along with the shift in the way in which the economy works.
Think back to that black and white film footage of end-of-day whistles blowing at large industrial complexes and of thousands of workers streaming out through the factory gates on foot or, if they were really rich, on bicycles. Then the vast majority of workers were on company payrolls and the self-employed made up a small, entrepreneurial minority. Fast forward and today we find more and more working as what is broadly termed self-employed. Contractors abound and as I learnt yesterday, by chance and in a completely separate context, that no more than half of those working on the Mini production line in Oxford are now actually on the BMW payroll; the rest are so-called “agency workers” which, in Hammond language, makes them self-employed.
When the self-employed make up a small part of the workforce, supporting them in the hope that their business might end up growing and creating new jobs makes sense. But when an ever decreasing proportion of the workforce finds itself subsidising an ever increasing one, it is fair to call a halt. As the papers note this morning, Hammond is hitting a very large part of the British workforce. In that observation alone lies the answer to the Chancellor’s conundrum, which he has taken on like a Gordian knot.
Apart from that, there was precious little that was contentious. John Major might have had the reputation for having been a little bit grey as a Chancellor; in comparison to Hammond he was veritable cockatoo. But then, going into the uncertainty of Brexit and all that malarkey, what more could one have asked for?
GROWING PAINS
The forecast for GDP growth for 2017 was raised by the Office for Budget Responsibility to 2% from 1.4% but forecasts were revised down to 1.6% for 2018 (1.7%), 1.7% for 2019 (2.1%) and 1.9% for 2020 (2.1%). The 2021 forecast was left unchanged at 2%. PSBR was also revised down to £51.7bn from £68.2bn for the current fiscal year with minor revisions in the future, all lower of course. How and on what grounds the OBR ended up revising its 2020-2021 borrowing requirement to £20.6bn from £20.7bn escapes me but I suppose government statisticians are a breed unto themselves.
Sterling did rise a tad during his speech but since it had begun the day down on Tuesday’s close, both those who saw weakness and those who saw strength are kind of right. In the event, at US$1.2160 (at the time of writing) the pound is closing in again on its post-Brexit low of US$1.20 and at the moment there is simply nobody of significance prepared to stand in its way and catch the falling knife.
That said, the weakness in the pound is not just driven by Westminster but is also an effect of a stronger dollar. Yesterday’s ADP employment release for February knocked the cover off the ball by coming in at 298,000 as opposed to consensus of 187,000. That will have the economists running for their calculators to recalibrate their forecasts for tomorrow’s nonfarm payroll figure. More to the point, it will have investors sharply raise their own probability of a Fed move on rates next Wednesday. I’m not sure where the quiz has been. Janet Yellen and her merry men have done all they can to prepare the markets for a 25bp increase in the Fed Funds target rate from 0.5%-0.75% to 0.75%-1%. May I remind those doubting Thomases that Q4/2016 GDP was reported at 1.9%, that CPI for January was 2.5% and that the unemployment rate was 4.7%, well below what would customarily have been seen as being full employment. More to the point, the Fed must not diverge from its brief and it must blank out all the noise coming from both Wall Street and Pennsylvania Avenue.
Ten- year Treasury rates have been under pressure since last week and after another round of selling they are now at 2.57% and heading back towards the two-and-a-half year high of 2.6%. But why not? A real return of 0.1% at 10 years (10-year rate minus CPI) is still derisory and not one anyone should be getting too excited about. It was interesting to hear David Tepper of Appaloosa come to the same conclusion that I have been banging on about for some time, namely that stocks are expensive but that it is irrational to short the market. One correspondent wrote to me a couple of days ago “…price action no longer the classic up trend of “higher highs & higher lows”, and yes from a technical point of view you could argue a short-term down trend is emerging…… But, it does not constitute a long-term reversal……Conclusion: Hedge!”
ECB
Furthermore, today brings the ECB out again. Mario Draghi, for so long St Mario, the patron saint of irresponsible politicians, is looking tired and, to be frank, rather lost. He has certainly thrown everything including the kitchen sink at the eurozone economy but with little effect. On the other hand, it is visibly undergoing a very plain vanilla cyclical recovery that one feels might have occurred in the just the same way and at just the same speed without a shredding of the eurozone monetary policy system. The ECB central council might just as well hang a sign outside the door today which reads “Policy unchanged; gone fishing”.
The political dynamics in France look less scary now than they have done for a long time. I heard Alpesh Patel of Praefinium Partners talking of the high probability of a Marine Le Pen presidency, which I believe to be utter rubbish. Latest polls suggest that Emmanuel Macron is quite likely to already beat Le Pen in the first round of the elections. If that were to be true, it’s game over and time to start buying back those French bonds.
Finally, and I’m no fan of the game with the round ball, I doff my cap to FC Barcelona. While they were doing their 6-1 on PSG I was out looking at E-Type Jaguars and learning a lot about a prostate cancer charity of which more in the coming weeks.
March really is marching ahead…..